Capital Goods: April 2012

Debt and taxes

James Madison got it right. Dealing with taxes, it’s difficult to separate self-interest from the public interest. At the nation’s founding, he wrote that their apportionment could tempt lawmakers to “trample on the rules of justice. Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.” By “inferior number,” he meant constituencies under-represented in a legislature.

Madison’s remedy to this inclination toward self-interest was a diverse, representative form of government. (OK, so his definition of diverse might not equal our own. Nonetheless, in his day, putting a Pennsylvania Quaker merchant in a room with a Virginia Anglican tobacco farmer would have led to some diverse opinions.) I suppose it is in the eye of the beholder as to how well the remedy has worked. What is true — whether in 1787 or today — is that when you are the one paying the taxes, they can seem awfully burdensome. And once that money leaves your pocket, it is not always easy to see the benefits.

That cost-benefit equation is being discussed a lot these days regarding unemployment-insurance taxes in North Carolina. Unfortunately for state businesses, a big part of the benefits have already accrued. The costs, escalating after three years of high unemployment, are just now coming due. That’s because North Carolina has borrowed $2.7 billion from the federal government for unemployment benefits. Now, the money has to be repaid.

So far, policymakers in Raleigh have been content mostly to sit and chew on just how to do it. State legislators instructed the Department of Commerce, which was recently given authority over the state’s unemployment-benefits system, to study the question. House Speaker Thom Tillis decided to have a separate task force examine fraud — estimated to be $170 million a year — in the system. But those studies won’t change the reality facing employers, workers and decision makers. Only three real options exist: Employers are going to have to pay more taxes, general taxpayers are going to have to pitch in, or the length of time recipients get unemployment benefits must be cut.

The unemployment-insurance tax is a dedicated tax. Employers pay it, and the money goes only to pay out unemployment benefits. The arrangement protects the money and, in times of plenty, has led to surpluses and cuts in the tax. It also has put the onus on employers to repay the debt. With no action by legislators last year, the tax rose automatically in January, by $7 per worker per year, due to the debt. More automatic increases loom unless one of those other options is taken.

As for putting general taxpayers on the hook, it’s hard to imagine that flying politically when school teachers are being laid off and college tuition is increasing three times the rate of inflation. In these days of tight budgets, you won’t find half a billion dollars lying around in some state agency’s untapped account. Even if you did, legislators would hear plenty of hollering from all kinds of folks if they started using general operating revenue, from sources such as sales and income taxes, to repay the unemployment debt. Some of the yelling would be about how legislators cut the unemployment-insurance tax four times during the 1990s, which seemed the right thing to do then. With the state’s jobless rate low, the tax was generating a surplus. Still, when bad times came, the surplus dried up, and those cuts ultimately contributed to the debt.

North Carolina is hardly alone. Thirty states have borrowed more than $44 billion from the feds to pay out unemployment benefits. As the debt mounted, several decided that the way to get ahead of the curve and begin repaying the debt was to reduce the duration of benefits. Most states, including North Carolina, traditionally paid 26 weeks of benefits. (More recently, workers could qualify for 53 additional weeks through a federal program.) Last year, Arkansas and Illinois reduced benefits to 25 weeks. South Carolina, Michigan and Missouri cut back to 20 weeks, and Florida reduced the time to as little as 12 weeks, depending on the unemployment rate.

There is little doubt that business groups here will push state legislators to follow suit. Maybe, if the economy and employment numbers keep improving, the pushback won’t be so great. As the debate begins in earnest, it’s worth recalling the benefit of these benefits. When most of this debt was piling up — back when the economy really stank in 2009 and 2010 — those unemployment checks kept people in their homes and allowed them to keep spending. That money circulated through the economy and prevented a bad situation, for everyone, from getting worse.

Scott Mooneyham is editor of The Insider, www.ncinsider.com. Email him at smooneyh@ncinsider.com.